Global trade flows and supply chains adjust gradually. Empirical estimates of the trade elasticity for the short run are about half as large as those for the long run and suggest that trade is subject to substantive adjustment frictions. We develop a tractable framework that provides microfoundations for dynamic trade adjustment. The model features staggered sourcing decisions, nests the Eaton-Kortum model as the limiting long-run case, and rationalizes reduced-form estimation of horizon-specific trade elasticities. We calibrate the model to horizon-specific trade elasticities and use it to quantify the welfare impact of the 2018 US-China trade war. Staggered sourcing decisions considerably exacerbate losses from the trade war, with cumulative welfare losses 300\% larger in the short run and 70\% larger in the long run than in the Eaton-Kortum benchmark. Third countries such as Mexico can suffer welfare losses in the short run and welfare gains in the long run.

How do the micro origins of firms' market power impact its aggregate implications? To answer this question, I develop a model of imperfect competition in output and factor markets with fixed costs; elastic factor supply; and variable markups and markdowns. I solve the planner's problem to characterize distortions, and show that the equilibrium behavior of firms and aggregates can be characterized in terms of sufficient statistics capturing departures from an observationally equivalent benchmark economy with competitive factor markets. I apply my results to decompose the societal costs of market power into three effects: (1) direct losses from inefficiencies in relative firm sizes, entry, and exit, (2) a deadweight loss, and (3) indirect efficiency gains or losses resulting from the interplay of competition and factor supply. Unbundling firms' market power, conditional on a set of common statistics, is not required for evaluating the first two effects; however, it is crucial for assessing indirect efficiency losses quantitatively and qualitatively. A quantitative exercise illustrates the importance of these results: indirect efficiency losses double and entry subsidies are much more effective once the interplay of markups and markdowns is accounted for.

This paper provides new theory and evidence on the importance of firm and worker heterogeneity for aggregate wage inequality and welfare. Using German micro-data, I show that relative wages and employment of skilled compared to less-skilled workers are higher at larger firms, suggesting that decisions regarding scale, the demand and wages for skill are interconnected within firms. I develop a model in which firms operate a non-homothetic production technology and hire heterogeneous workers in monopsonistic labor markets. The model provides a unified framework to study the joint determination of the firm size distribution, wage and skill distributions within firms, and aggregate wage inequality. I structurally estimate the model using a new method that separately identifies the elasticities of labor demand and supply. Quantitatively, I utilize trade liberalization to study how a shock that initiates changes in the firm size distribution impacts aggregate inequality by changing wage distribu- tions within and between firms. I find that trade raises inequality by 20 percent with within-firm effects accounting for 30 percent of the overall change. Turning to welfare, I show that a tax reform that corrects misallocations due to labor market frictions raises the gains from trade for all workers by improving worker-to-firm sorting and redistributing income from firm profits to wages.

This paper shows how trade in services fosters innovation by providing firms with access to foreign knowledge. Using rich firm-level data on services trade and innovation activity from Germany, we provide evidence that access to foreign knowledge inputs via services trade increases firms' innovativeness and complements their indigenously sourced innovation inputs. We use our reduced-form estimates to quantify the aggregate gains from services trade in a heterogeneous firm model featuring endogenous competition and innovation. Our analysis suggests that the welfare gains from knowledge services trade are potentially sizable, albeit largely unrealized.

We provide an economic analysis of a market for record-keeping instantiated using succinct proof systems. Our model allows for adaptive adjustments in predi- cate (block) size according to pre-specified update rules. We show that when block rewards are absent, there exists a predicate size update rule, based on observed changes in difficulty, that induces stable equilibrium levels of transaction fees and congestion at varying levels of user demand. Our theoretical results highlight the importance of economic incentives for the design of cost-efficient, scalable systems around a Non-Interactive Zero-Knowledge proof as the consensus puzzle.

A comprehensive simulation model to quantify consequences of globalization for prosperity in the world economy.

This paper draws a causal link between increased levels of global value chain participation (GVCP) and increases in a country’s current account. We document empirically that stronger GVCP is associated with larger current account balances. According to our estimates, cross-country differences in GVCP reduce the hitherto unexplained part of current account imbalances substantially for some countries. For example, for the United States and Japan the unexplained part of the current account falls by 75% and 50% over the sample period when controlling for their GVCP relative to the rest of the world; for Germany, the unexplained part of the current account deficit falls by an average of 10%.